Two economists in one!

posted at 8:48 am on July 6, 2010 by King Banaian

…public policy designd to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. Most economically advanced countries provide benefits to laid-off workers as a way to tide them over until they find a new job. In the United States, these benefits typically replace only a small fraction of worker’s income and expire after 26 weeks. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European economies.

Second,

Do unemployment benefits reduce the incentive to seek work? Yes: workers receiving unemployment benefits aren’t quite as desperate as workers without benefits, and are likely to be slightly more choosy about accepting new jobs. The operative word here is “slightly”: recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed. Still, it’s a real effect when the economy is doing well.

But it’s an effect that is completely irrelevant to our current situation. When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise.

“Slightly” does not appear in the first quote. Yet they were written by the same person: Paul Krugman from, first, his principles textbook and, second, his op-ed this morning.

The paper he cites (and also cited by Ezra Klein last Friday) is a recent research note from Federal Reserve Bank of San Francisco economists Rob Valetta and Katherine Kuang. They separate the duration of unemployment of those who were involuntarily separated from their jobs (thus eligible for UI) and those who either quit or left their jobs (and ineligible.) The job losers have an average duration of 1.6 weeks longer. This is assumed to be entirely due to the difference in UI eligibility. Valetta and Kuang estimate that the effect on the December 2009 unemployment rate is to add 0.4%, which they call “quite small.” (Worth noting that the fall to 9.5% in June from 10% back then is called “headed in the right direction” by President Obama. But that’s to be explained by Obama’s speechwriters, not Valetta and Kuang.)

A hint to non-academic economic readers: When you see someone say “recent economic research says that …” you can bet they are trying to slide by what the bulk of research before that said. That is, they may be cherrypicking. Valetta and Kuang cite a recent study in the prestigious Journal of Political Economy by Raj Chetty (ungated copy here.) He cites that the original evidence on unemployment is that “a 10% increase in unemployment benefits raises average unemployment durations by 4-8% in the U.S.” Chetty doesn’t dispute that point but rather shows that the effect is more one of families being cash-constrained, that liquidity drives the job search rather than the substitution of subsidized leisure for search and labor. His argument is for a higher unemployment insurance benefit, not an extension of weeks. That is, Chetty doesn’t necessarily change the 4-8% estimate (which would be consistent with the Valetta and Kuang estimates, by the way) but the reasoning behind it.

So I do not understand why Krugman the textbook writer would argue unemployment benefits is a significant explanation for Eurosclerosis while Krugman the op-ed writer would encourage us to adopt those European policies. Nothing changed in the results. They applied for the U.S. in good times and bad (or, at least, they haven’t shown a significantly different result in periods of slack demand, contra Krugman’s assertion.) One of those passages is misleading the reader. Which is it?

This post was promoted from GreenRoom to HotAir.com.
To see the comments on the original post, look here.

Blowback

Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.

So… Krugman is shaping his narrative with political expediency in mind? I’m shocked! Wait, no. I’m not shocked at all. Krugman’s a political hack masquerading as a bad economist. Or masquerading as an economist, badly. Hard to tell, really.

“Eurosclerosis,” the persistent high unemployment that affects a number of European economies.

The company I work for has an office in Europe. They flat out told us that if layoffs happen, they happen in the US first because it is so difficult and costly to let someone in Europe go.

Therefore, I think a better explanation of high European unemployment rates is that employers are very selective and cautious about hiring because they know it will be damn near impossible to get rid of someone once they’re hired.

How krugy types look themselves in the mirror is beyond me…or anybody else at the nyt for that matter

winston on July 6, 2010 at 9:16 AM

When they look in the mirror, they see the most brilliant thinkers in society, they love what they see, and they see nothing wrong, or anything to change…they are pure.
It is you and I who are pathetic losers, people who actually have to work for a living, we are the minions, the peons, the unclean, the ones “not chosen” to lead or educate…you are meaningless to these great men and women who tell us how to think, and when it is appropriate to think.
Please, peasant, keep your complaints to yourself, you are worthless, ill informed, crass…and you work for a living.

This is why I have to wonder as to whether the Left is full of incompetence. Krugman does know economics, yet continues to shill for bankrupt socialist policies. To claim that he, and Dear Liar’s advisers are simply unknowing fools is to misunderestimate them.

David Brooks actually slams Krugman indirectly this morning. He compares the academic theory of demand side stimulus with its actual effect in the real world. Read the whole thing, but how could he NOT be referring to Krugman with the following quote:

These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model?

Remember when pay-go passed? Remember how the Democrats were all puffed up on TV about it? And how the next week they kept right on with their massive defect spending?

Next January the tax code changes, radically, Charlie Rangel finally gets his fondest wishes come true, the end of this year will look like boom time because anybody that can will sell off what they don’t want to be taxed to death on next year, 2011, will look like the bottom fell out.

Republicans believe every day is the Fourth of July, but the democrats believe every day is April 15.
Ronald Reagan

They just say whatever, whenever. Remember, silly notions like integrity and honesty are merely relics of those dark ages when men were ruled by the voice of the Creator in their hearts and minds. Why would we want to regress to those bleak times, when secular humanism and moral relativism have done so much? Can you imagine how awful things would be if all men were to be true to their words? Were fair and honest in their dealings with others? Took responsibility for themselves and their families? Loved their neighbors? That would truly be hell on earth.

See Julien Benda’s “Treason of the Intellectuals.” Krugman has cast away any pretense of scholarship, and is now just shilling for a political agenda. Yes, it’s undignified and unworthy of a scholar, but, on the bright side, it gives you a pretty good idea of how much weight to give any of Krug’s pronouncements.

Krugman is the perfect liberal. He thinks he knows where he wants to go, but has no clue how to get there. The problem with liberals is they cannot comprehend creating and producing is more than just a thought process. Accountability is not a part of their psyche.

So I do not understand why Krugman the textbook writer would argue unemployment benefits is a significant explanation for Eurosclerosis while Krugman the op-ed writer would encourage us to adopt those European policies.

Oh, come on, KB, you know exactly why. Krugman is a media whore who suddenly found a way to be relevant by shilling for the Obama administration. The DC cocktail circuit is a powerful incentive to go whichever way the political wind is blowing.

When you see someone say “recent economic research says that …”

If I tried to get a paper published using this obvious straw man to support my thesis, I’d be laughed out of the academic community.

The problem is that a person getting $X per week in jobless benefits isn’t likely to take a job that pays less than $X per week. This is particularly true for someone who might have a family to feed. Then extending benefits to 99 weeks as Congress is wanting to do might enable someone to stay on such benefits for nearly two years before they finally move to a different area if nothing is available in their location.

Couple this with the fact that many people who own their homes can not sell them due to underwater mortgages and you have a situation where people are either unable or unwilling to migrate from areas where jobs are scarce to areas where the economy might be better. You can’t leave without either walking away from a mortgage or going so in debt that you are not likely to ever get out of it.

What government could do is modify TARP to be used more in line with how it was originally intended. For example, for people whose home mortgage is more than 20% “under water”, reset the principal amount on the loan to the current going value +20%. Allow the TARP money to offset the difference to the holder of the mortgage with the caveat that if the home is sold for more than the reset principal value, the difference goes back to the Treasury.

So, if you have a $600,000 primary mortgage balance on a home now selling for $300,000, the principal would be reset to $360,000. TARP would cover the $240,000 loss to the lender. Should the property sell later for $500,000 then the government would get $140,000 back (500,000 – 360,000) but any equity below $360,000 would be the homeowners. So if they paid that $360,000 adjusted mortgage down to a $200,000 balance before they sold, the homeowner would still have $160K of equity to use to purchase another home. Only any amount over $360K up to the original loan amount of $600K would go back to the government.

This would give incentive for people not to walk out on mortgages, it would allow people to sell homes and go where the jobs are, it would breathe some life into the real estate markets and it would get banks lending again.

We need to start thinking seriously about lowering the minimum wage. Get people back to work, and give businesses incentive to start hiring them again. Minimum wage and the new health care regulations, not to mention the business-is-the-Devil attitude of this administration is killing our economy’s growth.

That by itself will not fix the problem. Union contracts and “union scale” rates also serve as a floor to wages. So do federal requirements. For example, I have a friend who is a civil engineer with a city in my state. When they use federal funds for a project, the federal government demands that pay scales for the job be up to 2x what pay scales would be if city or state money is used for the project. Taking federal funds automatically results in a nearly 2x cost of the project because wages are a huge part of the total cost and there is the problem of additional paperwork involved and it limits their choice of contactors. The city is getting to the point where they try at all costs to avoid taking federal funds.

One other point is the racist nature of federal funding. Sometimes the feds will say you *must* use a minority contractor. There might be only one minority contractor in their city and that contractor might be booked solid for the next year. So then they must go to a different contractor from a different city. Now the federal funds to their town is actually providing jobs for people in possibly a completely different area of the state and the funds do not end up in their community anyway.

The strings attached to federal programs can make using them counter productive.

For liberals, it’s all about politics. Everything comes from politics, everything is devoted to politics, everything is due to politics. Everything, including science and economics, is subservient to politics.

If the politics changes, the science and economics must change to support the politics. That’s all this is. There is no objective reality outside of politics.

I love the logic in the article, and the commenters there who parrot it…

“Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending.”

That’s brilliant economics. Consider this as a business model: You give people money only if they spend it at your store, then they use that money to buy all your goods and you get all that money back as earnings. How brilliant is that?

One quick question though: How is this better than handing out all your goods for free? I see no practical difference from the point of view of the person funding the “consumer spending” that is supposed to be so beneficial. You lose all your goods and have the same money you had when you started in both situations don’t you?

Um, if this is the level of intellect required; I should apply for some Nobel prizes. I can promote truly disastrous clearly counter-productive and bankruptcy inducing plans…

Wait, would I have to be able to keep a straight face while promoting this idiocy? Yeah, I think I see the flaw in my plan now; I’m slightly more impressed with Krugman’s Nobel if he could promote this level of stupidity and fecklessness with a straight face. Although I still don’t think any better of his economic abilities.

I took a Macroeconomics class in Spring 2009 using Krugman’s textbook. I asked my professor why he seemed to be slightly more conservative in the textbook than in real life, and he said that probably he just wanted his textbook to have a wider appeal or maybe the publisher required it. I found the book to be a little inconsistent in other matters as well.

Lawrence Summers (Director of the White House’s National Economic Council for President Barack Obama) said a similar thing in the past:

“Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000.“